[Federal Register Volume 85, Number 133 (Friday, July 10, 2020)]
[Proposed Rules]
[Pages 41448-41463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13741]
[[Page 41448]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2020-0021]
RIN 3170-AA98
Qualified Mortgage Definition Under the Truth in Lending Act
(Regulation Z): Extension of Sunset Date
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule with request for public comment.
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SUMMARY: With certain exceptions, Regulation Z requires creditors to
make a reasonable, good faith determination of a consumer's ability to
repay any residential mortgage loan, and loans that meet Regulation Z's
requirements for ``qualified mortgages'' (QMs) obtain certain
protections from liability. One category of QMs consists of loans that
are eligible for purchase or guarantee by either the Federal National
Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage
Corporation (Freddie Mac) (collectively, government-sponsored
enterprises, or GSEs), while operating under the conservatorship or
receivership of the Federal Housing Finance Agency (FHFA). The GSEs are
currently under Federal conservatorship. The Bureau of Consumer
Financial Protection (Bureau) established this category of QMs
(Temporary GSE QM loans) as a temporary measure that is set to expire
no later than January 10, 2021 (the sunset date) or when the GSEs exit
conservatorship. Another category of QMs is the General QM loan
category. In a separate proposal released simultaneously with this
proposal, the Bureau proposes amendments to the General QM loan
definition. In this notice of proposed rulemaking, the Bureau proposes
to amend Regulation Z to replace the sunset date of the Temporary GSE
QM loan definition with a provision that extends the Temporary GSE QM
loan definition to expire upon the effective date of final amendments
to the General QM loan definition. The Bureau is not proposing to amend
the provision stating that the Temporary GSE QM loan category would
expire if the GSEs exit conservatorship. The Bureau is proposing to
extend the Temporary GSE QM loan definition to ensure that responsible,
affordable mortgage credit remains available to consumers who may be
affected if the Temporary GSE QM loan definition expires before the
amendments to the General QM loan definition take effect.
DATES: Comments must be received on or before August 10, 2020.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2020-
0021 or RIN 3170-AA98, by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: 2020-NPRM-ATRQM-SunsetDate@cfpb.gov. Include Docket
No. CFPB-2020-0021 or RIN 3170-AA98 in the subject line of the message.
Mail/Hand Delivery/Courier: Comment Intake--QM Extension
of Sunset Date, Bureau of Consumer Financial Protection, 1700 G Street
NW, Washington, DC 20552. Please note that due to circumstances
associated with the COVID-19 pandemic, the Bureau discourages the
submission of comments by mail, hand delivery, or courier.
Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking.
Because paper mail in the Washington, DC area and at the Bureau is
subject to delay, and in light of difficulties associated with mail and
hand deliveries during the COVID-19 pandemic, commenters are encouraged
to submit comments electronically. In general, all comments received
will be posted without change to https://www.regulations.gov. In
addition, once the Bureau's headquarters reopens, comments will be
available for public inspection and copying at 1700 G Street NW,
Washington, DC 20552, on official business days between the hours of 10
a.m. and 5 p.m. Eastern Time. At that time, you can make an appointment
to inspect the documents by telephoning 202-435-9169.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Proprietary information or sensitive personal information, such as
account numbers or Social Security numbers, or names of other
individuals, should not be included. Comments will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Benjamin Cady, Counsel; or David
Friend or Priscilla Walton-Fein, Senior Counsels, Office of
Regulations, at 202-435-7700. If you require this document in an
alternative electronic format, please contact
CFPB_Accessibility@cfpb.gov.
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule or Rule)
requires a creditor to make a reasonable, good faith determination of a
consumer's ability to repay a residential mortgage loan according to
its terms. Loans that meet the Rule's requirements for QMs obtain
certain protections from liability. The Rule defines several categories
of QMs.
One QM category defined in the Rule is the General QM loan
category. General QM loans must comply with the Rule's prohibitions on
certain loan features, its points-and-fees limits, and its underwriting
requirements. For General QM loans, the ratio of the consumer's total
monthly debt to total monthly income (DTI ratio) must not exceed 43
percent. Creditors must calculate, consider, and verify debt and income
for purposes of determining the consumer's DTI ratio using the
standards contained in appendix Q of Regulation Z.
A second, temporary category of QM loans defined in the Rule
consists of mortgages that (1) comply with the same loan-feature
prohibitions and points-and-fees limits as General QM loans and (2) are
eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac
while under the conservatorship of the FHFA. This proposal refers to
these loans as Temporary GSE QM loans, and the provision that created
this loan category is commonly known as the GSE Patch. Unlike for
General QM loans, the Rule does not prescribe a DTI limit for Temporary
GSE QM loans. Thus, a loan can qualify as a Temporary GSE QM loan even
if the consumer's DTI ratio exceeds 43 percent, so long as the loan is
eligible to be purchased or guaranteed by either of the GSEs. In
addition, for Temporary GSE QM loans, the Rule does not require
creditors to use appendix Q to determine the consumer's income, debt,
or DTI ratio.
Under the Rule, the Temporary GSE QM loan definition expires with
respect to each GSE when that GSEs exits conservatorship or on January
10, 2021, whichever comes first. The GSEs are currently in
conservatorship. Despite the Bureau's expectations when the Rule was
published in 2013, Temporary GSE QM loan originations continue to
represent a large and persistent share of the residential mortgage loan
market, and a significant number of Temporary GSE QM loans would not
qualify as General QM loans under the current regulations after the
Temporary GSE QM loan definition expires. These loans would not qualify
as General QM loans
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either because the consumer's DTI ratio is above 43 percent or because
the creditor's method of documenting and verifying income or debt is
incompatible with appendix Q. Although alternative loan options,
including some other types of QM loans, would still be available to
many consumers who could not qualify for General QM loans, the Bureau
anticipates that many loans that are currently Temporary GSE QM loans
would cost materially more for consumers and many would not be made at
all.
In a separate proposal issued simultaneously with this proposal,
the Bureau is proposing, among other things, to remove the General QM
loan definition's DTI limit and replace it with a limit based on the
loan's pricing. The Bureau expects that such amendments would allow
some portion of loans that currently could receive QM status under the
Temporary GSE QM loan definition to receive QM status under the General
QM loan definition if they are made after the Temporary GSE QM loan
definition expires, thereby helping to facilitate a smooth and orderly
transition away from the Temporary GSE QM loan definition. The Bureau
tentatively concludes that having the Temporary GSE QM loan definition
expire when a final rule amending the General QM loan definition
becomes effective will ensure that responsible, affordable mortgage
credit remains available to consumers who may be affected if the
Temporary GSE QM loan definition expires before the amendments to the
General QM loan definition take effect.
In light of these and other considerations, the Bureau proposes to
extend the Temporary GSE QM loan definition to the effective date of a
final rule issued by the Bureau amending the General QM loan
definition. The Bureau does not intend for this effective date to be
prior to April 1, 2021. Thus, the Bureau does not intend for the
Temporary GSE QM loan definition to expire prior to April 1, 2021. The
Bureau is not proposing to amend the provision stating that the
Temporary GSE QM loan category would expire if the GSEs exit
conservatorship.
II. Background
A. Dodd-Frank Act Amendments to the Truth in Lending Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) amended the Truth in Lending Act (TILA) to establish,
among other things, ability-to-repay (ATR) requirements in connection
with the origination of most residential mortgage loans.\1\ The
amendments were intended ``to assure that consumers are offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay the loans and that are understandable and not
unfair, deceptive or abusive.'' \2\ As amended, TILA prohibits a
creditor from making a residential mortgage loan unless the creditor
makes a reasonable and good faith determination based on verified and
documented information that the consumer has a reasonable ability to
repay the loan.\3\
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\1\ Public Law 111-203, 1411-12, 1414, 124 Stat. 1376 (2010); 15
U.S.C. 1639c.
\2\ 15 U.S.C. 1639b(a)(2).
\3\ 15 U.S.C. 1639c(a)(1). TILA section 103 defines
``residential mortgage loan'' to mean, with some exceptions
including open-end credit plans, ``any consumer credit transaction
that is secured by a mortgage, deed of trust, or other equivalent
consensual security interest on a dwelling or on residential real
property that includes a dwelling.'' 15 U.S.C. 1602(dd)(5). TILA
section 129C also exempts certain residential mortgage loans from
the ATR requirements. See, e.g., 15 U.S.C. 1639c(a)(8) (exempting
reverse mortgages and temporary or bridge loans with a term of 12
months or less).
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TILA identifies the factors a creditor must consider in making a
reasonable and good faith assessment of a consumer's ability to repay.
These factors are the consumer's credit history, current and expected
income, current obligations, debt-to-income ratio or residual income
after paying non-mortgage debt and mortgage-related obligations,
employment status, and other financial resources other than equity in
the dwelling or real property that secures repayment of the loan.\4\ A
creditor, however, may not be certain whether its ability-to-repay
determination is reasonable in a particular case, and it risks
liability if a court or an agency, including the Bureau, later
concludes that the ability-to-repay determination was not reasonable.
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\4\ 15 U.S.C. 1639c(a)(3).
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TILA addresses this uncertainty by defining a category of loans--
called QMs--for which a creditor ``may presume that the loan has met''
the ATR requirements.\5\ The statute generally defines a QM to mean any
residential mortgage loan for which:
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\5\ 15 U.S.C. 1639c(b)(1).
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There is no negative amortization, interest-only payments,
or balloon payments;
The loan term does not exceed 30 years;
The total points and fees generally do not exceed 3
percent of the loan amount;
The income and assets relied upon for repayment are
verified and documented;
The underwriting uses a monthly payment based on the
maximum rate during the first five years, uses a payment schedule that
fully amortizes the loan over the loan term, and takes into account all
mortgage-related obligations; and
The loan complies with any guidelines or regulations
established by the Bureau relating to the ratio of total monthly debt
to monthly income or alternative measures of ability to pay regular
expenses after payment of total monthly debt.\6\
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\6\ 15 U.S.C. 1639c(b)(2)(A).
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B. The Ability-to-Repay/Qualified Mortgage Rule
In January 2013, the Bureau issued a final rule amending Regulation
Z to implement TILA's ATR requirements (January 2013 Final Rule).\7\
The January 2013 Final Rule became effective on January 10, 2014, and
the Bureau amended it several times through 2016.\8\ This proposal
refers to the January 2013 Final Rule and later amendments to it
collectively as the Ability-to-Repay/Qualified Mortgage Rule, the ATR/
QM Rule, or the Rule. The ATR/QM Rule implements the statutory ATR
provisions discussed above and defines several categories of QM
loans.\9\ Under the Rule, a creditor that makes a QM loan is protected
from liability presumptively or conclusively, depending on whether the
loan is ``higher priced.'' \10\
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\7\ 78 FR 6408 (Jan. 30, 2013).
\8\ See 78 FR 35429 (June 12, 2013); 78 FR 44686 (July 24,
2013); 78 FR 60382 (Oct. 1, 2013); 79 FR 65300 (Nov. 3, 2014); 80 FR
59944 (Oct. 2, 2015); 81 FR 16074 (Mar. 25, 2016).
\9\ 12 CFR 1026.43(c), (e).
\10\ The Rule generally defines a ``higher priced'' covered
transaction to mean a first-lien mortgage with an annual percentage
rate (APR) that exceeds the average prime offer rate (APOR) for a
comparable transaction as of the date the interest rate is set by
1.5 or more percentage points; or a subordinate-lien transaction
with an APR that exceeds APOR for a comparable transaction as of the
date the interest rate is set by 3.5 or more percentage points. 12
CFR 1026.43(b)(4). A creditor that makes a QM loan that is not
``higher priced'' is entitled to a conclusive presumption that it
has complied with the Rule--i.e., the creditor receives a safe
harbor. 12 CFR 1026.43(e)(1)(i). A creditor that makes a QM loan
that is ``higher priced'' is entitled to a rebuttable presumption
that it has complied with the Rule. 12 CFR 1026.43(e)(1)(ii).
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1. General QM Loans
One category of QM loans defined by the Rule consists of ``General
QM loans.'' A loan is a General QM loan if:
The loan does not have negative-amortization, interest-
only, or balloon-payment features, a term that exceeds 30 years, or
points and fees that exceed specified limits; \11\
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\11\ 12 CFR 1026.43(e)(2)(i)-(iii).
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[[Page 41450]]
The creditor underwrites the loan based on a fully
amortizing schedule using the maximum rate permitted during the first
five years; \12\
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\12\ 12 CFR 1026.43(e)(2)(iv).
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The creditor considers and verifies the consumer's income
and debt obligations in accordance with appendix Q; \13\ and
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\13\ 12 CFR 1026.43(e)(v).
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The consumer's DTI ratio is no more than 43 percent (DTI
limit), determined in accordance with appendix Q.\14\
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\14\ 12 CFR 1026.43(e)(2)(vi).
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Appendix Q contains standards for calculating and verifying debt
and income for purposes of determining whether a mortgage satisfies the
43 percent DTI limit for General QM loans. The standards in appendix Q
were adapted from guidelines maintained by the Federal Housing
Administration (FHA), of the U.S. Department of Housing and Urban
Development (HUD) when the January 2013 Final Rule was issued.\15\
Appendix Q addresses how to determine a consumer's employment-related
income (e.g., income from wages, commissions, and retirement plans);
non-employment related income (e.g., income from alimony and child
support payments, investments, and property rentals); and liabilities,
including recurring and contingent liabilities and projected
obligations.\16\
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\15\ 78 FR 6408, 6527-28 (Jan. 30, 2013) (noting that appendix Q
incorporates, with certain modifications, the definitions and
standards in HUD Handbook 4155.1, Mortgage Credit Analysis for
Mortgage Insurance on One-to-Four-Unit Mortgage Loans).
\16\ 12 CFR 1026, appendix Q.
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2. Temporary GSE QM Loans
A second, temporary category of QM loans defined by the Rule,
Temporary GSE QM loans, consists of mortgages that (1) comply with the
Rule's prohibitions on certain loan features, its underwriting
requirements, and its limitations on points and fees; \17\ and (2) are
eligible to be purchased or guaranteed by either GSE while under the
conservatorship of the FHFA.\18\ Unlike for General QM loans,
Regulation Z does not prescribe a DTI limit for Temporary GSE QM loans.
Thus, a loan can qualify as a Temporary GSE QM loan even if the DTI
ratio exceeds 43 percent, as long as the DTI ratio meets the applicable
GSE's DTI requirements and other underwriting criteria. In addition,
income and debt for such loans, and DTI ratios, generally are verified
and calculated using GSE standards, rather than appendix Q. The
Temporary GSE QM loan category--also known as the GSE Patch--is
scheduled to expire with respect to each GSE when that GSE exits
conservatorship or on January 10, 2021, whichever comes first.\19\
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\17\ 12 CFR 1026.43(e)(2)(i)-(iii).
\18\ 12 CFR 1026.43(e)(4).
\19\ 12 CFR 1026.43(e)(4)(iii)(B). The ATR/QM Rule created
several additional categories of QM loans. The first additional
category consisted of mortgages eligible to be insured or guaranteed
(as applicable) by HUD (FHA loans), the U.S. Department of Veterans
Affairs (VA loans), the U.S. Department of Agriculture (USDA loans),
and the Rural Housing Service (RHS loans). 12 CFR
1026.43(e)(4)(ii)(B)-(E). This temporary category of QM loans no
longer exists because the relevant Federal agencies have since
issued their own QM rules. See, e.g., 24 CFR 203.19 (HUD rule).
Other categories of QM loans provide more flexible standards for
certain loans originated by certain small creditors. 12 CFR
1026.43(e)(5), (f); cf. 12 CFR 1026.43(e)(6) (applicable only to
covered transactions for which the application was received before
April 1, 2016).
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C. The Bureau's Assessment of the Ability-to-Repay/Qualified Mortgage
Rule
Section 1022(d) of the Dodd-Frank Act requires the Bureau to assess
each of its significant rules and orders and to publish a report of
each assessment within five years of the effective date of the rule or
order.\20\ The Bureau noted in the January 2013 Final Rule that its
section 1022(d) assessment of the ATR/QM Rule would provide an
opportunity to analyze the Temporary GSE QM loan definition and
confirm, prior to its expiration, whether it would be appropriate to
allow it to expire.\21\ The Bureau published its report as a result of
its assessment on January 11, 2019 (Assessment Report).\22\
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\20\ 12 U.S.C. 5512(d).
\21\ 78 FR 6408, 6533-34 (Jan. 30, 2013).
\22\ Bureau of Consumer Fin. Prot., Ability-to-Repay and
Qualified Mortgage Rule Assessment Report (Jan. 2019), 2019)
(Assessment Report), https://files.consumerfinance.gov/f/documents/cfpb_ability-to-repay-qualified-mortgage_assessment-report.pdf.
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D. Effects of the COVID-19 Pandemic on Mortgage Markets
The COVID-19 pandemic has had a significant effect on the U.S.
economy. Economic activity has contracted, many businesses have
partially or completely closed, and millions of workers have become
unemployed. The pandemic has also affected mortgage markets. Among
other things, it has resulted in a contraction of mortgage credit
availability for many consumers, including those that would be
dependent on the non-QM market for financing. The pandemic's impact on
both the secondary market for new originations and on the servicing of
existing mortgages has contributed to this contraction. These effects,
and other effects of the pandemic, are discussed in greater detail in
the separate proposal the Bureau is releasing simultaneously with this
proposal.\23\
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\23\ See Bureau of Consumer Fin. Prot., ``Qualified Mortgage
Definition under the Truth in Lending Act (Regulation Z): General QM
Loan Definition,'' part II.D.
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III. The Rulemaking Process
The Bureau has solicited and received substantial public and
stakeholder input on issues related to the substance of this proposed
rule. In addition to the Bureau's discussions with and communications
from industry stakeholders, consumer advocates, other Federal
agencies,\24\ and members of Congress, the Bureau issued requests for
information (RFIs) in 2017 and 2018 and in July 2019 issued an advance
notice of proposed rulemaking regarding the ATR/QM Rule (ANPR). The
input from these RFIs and from the ANPR is briefly summarized below.
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\24\ The Bureau has consulted with agencies including the FHFA,
the Board of Governors of the Federal Reserve System (Board), FHA,
the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, the Federal Trade Commission, the
National Credit Union Administration, and the Department of the
Treasury.
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A. The Requests for Information
In June 2017, the Bureau published a request for information in
connection with the Assessment Report (Assessment RFI).\25\ In response
to the Assessment RFI, the Bureau received approximately 480 comments
from creditors, industry groups, consumer advocacy groups, and
individuals.\26\ The comments addressed a variety of topics, including
the General QM loan definition and the 43 percent DTI limit; perceived
problems with, and potential changes and alternatives to, appendix Q;
and how the Bureau should address the expiration of the Temporary GSE
QM loan definition. The comments expressed a range of ideas for
addressing the expiration of the Temporary GSE QM loan definition, from
making the definition permanent, to applying the definition to other
mortgage products, to extending it for various periods of time, or some
combination of those suggestions. Other comments stated that the
Temporary GSE QM loan definition should be eliminated or permitted to
expire.
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\25\ 82 FR 25246 (June 1, 2017).
\26\ See Assessment Report, supra note 22, at appendix B
(summarizing comments received in response to the Assessment RFI).
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Beginning in January 2018, the Bureau issued a general call for
evidence seeking comment on its enforcement, supervision, rulemaking,
market monitoring, and financial
[[Page 41451]]
education activities.\27\ As part of the call for evidence, the Bureau
published requests for information relating to, among other things, the
Bureau's rulemaking process,\28\ the Bureau's adopted regulations and
new rulemaking authorities,\29\ and the Bureau's inherited regulations
and inherited rulemaking authorities.\30\ In response to the call for
evidence, the Bureau received comments on the ATR/QM Rule from
stakeholders, including consumer advocacy groups and industry groups.
The comments addressed a variety of topics, including the General QM
loan definition, appendix Q, and the Temporary GSE QM loan definition.
The comments also raised concerns about, among other things, the risks
of allowing the Temporary GSE QM loan definition to expire without any
changes to the General QM loan definition or appendix Q. The concerns
raised in these comments were similar to those raised in response to
the Assessment RFI, discussed above.
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\27\ See Bureau of Consumer Fin. Prot., Call for Evidence,
https://www.consumerfinance.gov/policy-compliance/notice-opportunities-comment/archive-closed/call-for-evidence (last updated
June 12, 2020).
\28\ 83 FR 10437 (Mar. 9, 2018).
\29\ 83 FR 12286 (Mar. 21, 2018).
\30\ 83 FR 12881 (Mar. 26, 2018).
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B. The Advance Notice of Proposed Rulemaking
On July 25, 2019, the Bureau issued an advance notice of proposed
rulemaking regarding the ATR/QM Rule (ANPR). The ANPR stated the
Bureau's tentative plans to allow the Temporary GSE QM loan definition
to expire in January 2021 or after a short extension, if necessary, to
facilitate a smooth and orderly transition away from the Temporary GSE
QM loan definition. The Bureau also stated that it was considering
whether to propose revisions to the General QM loan definition in light
of the potential expiration of the Temporary GSE QM loan definition and
requested comments on several topics related to the General QM loan
definition, including whether and how the Bureau should revise the DTI
limit in the General QM loan definition; whether the Bureau should
supplement or replace the DTI limit with another method for directly
measuring a consumer's personal finances; whether the Bureau should
revise appendix Q or replace it with other standards for calculating
and verifying a consumer's debt and income; and whether, instead of a
DTI limit, the Bureau should adopt standards that do not directly
measure a consumer's personal finances.\31\ The Bureau requested
comment on how much time industry would need to change its practices in
response to any changes the Bureau makes to the General QM loan
definition.\32\ The Bureau received 85 comments on the ANPR from
businesses in the mortgage industry (including creditors), consumer
advocacy groups, elected officials, individuals, and research centers.
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\31\ 84 FR 37155, 37155, 37160-62 (July 31, 2019).
\32\ Id. at 37162. The Bureau stated that if the answer to this
question depends on how the Bureau revises the definition, the
Bureau requested answers based on alternative possible definitions.
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IV. Legal Authority
The Bureau is proposing to amend Regulation Z pursuant to its
authority under TILA and the Dodd-Frank Act. Section 1061 of the Dodd-
Frank Act transferred to the Bureau the ``consumer financial protection
functions'' previously vested in certain other Federal agencies,
including the Board. The Dodd-Frank Act defines the term ``consumer
financial protection function'' to include ``all authority to prescribe
rules or issue orders or guidelines pursuant to any Federal consumer
financial law, including performing appropriate functions to promulgate
and review such rules, orders, and guidelines.'' \33\ Title X of the
Dodd-Frank Act (including section 1061), along with TILA and certain
subtitles and provisions of title XIV of the Dodd-Frank Act, are
Federal consumer financial laws.\34\
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\33\ 12 U.S.C. 5581(a)(1)(A).
\34\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14)
(defining ``Federal consumer financial law'' to include the
``enumerated consumer laws'' and the provisions of title X of the
Dodd-Frank Act), Dodd-Frank Act section 1002(12)(O), 12 U.S.C.
5481(12)(O) (defining ``enumerated consumer laws'' to include TILA).
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Section 105(a) of TILA directs the Bureau to prescribe regulations
to carry out the purposes of TILA and states that such regulations may
contain such additional requirements, classifications,
differentiations, or other provisions and may further provide for such
adjustments and exceptions for all or any class of transactions that
the Bureau judges are necessary or proper to effectuate the purposes of
TILA, to prevent circumvention or evasion thereof, or to facilitate
compliance therewith.\35\ A purpose of TILA is ``to assure a meaningful
disclosure of credit terms so that the consumer will be able to compare
more readily the various credit terms available to him and avoid the
uninformed use of credit.'' \36\ Additionally, a purpose of TILA
sections 129B and 129C is to assure that consumers are offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay the loans and that are understandable and not
unfair, deceptive, or abusive.\37\ As discussed in the section-by-
section analysis below, the Bureau is proposing to issue certain
provisions of this proposed rule pursuant to its rulemaking,
adjustment, and exception authority under TILA section 105(a).
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\35\ 15 U.S.C. 1604(a).
\36\ 15 U.S.C. 1601(a).
\37\ 15 U.S.C. 1639b(a)(2).
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Section 129C(b)(3)(B)(i) of TILA authorizes the Bureau to prescribe
regulations that revise, add to, or subtract from the criteria that
define a QM upon a finding that such regulations are necessary or
proper to ensure that responsible, affordable mortgage credit remains
available to consumers in a manner consistent with the purposes of TILA
section 129C; or are necessary and appropriate to effectuate the
purposes of TILA sections 129B and 129C, to prevent circumvention or
evasion thereof, or to facilitate compliance with such sections.\38\ In
addition, TILA section 129C(b)(3)(A) directs the Bureau to prescribe
regulations to carry out the purposes of section 129C.\39\ As discussed
in the section-by-section analysis below, the Bureau is proposing to
issue certain provisions of this proposed rule pursuant to its
authority under TILA section 129C(b)(3)(B)(i).
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\38\ 15 U.S.C. 1639c(b)(3)(B)(i).
\39\ 15 U.S.C. 1639c(b)(3)(A).
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Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to
prescribe rules to enable the Bureau to administer and carry out the
purposes and objectives of the Federal consumer financial laws, and to
prevent evasions thereof.\40\ TILA and title X of the Dodd-Frank Act
are Federal consumer financial laws. Accordingly, the Bureau is
proposing to exercise its authority under Dodd-Frank Act section
1022(b) to prescribe rules that carry out the purposes and objectives
of TILA and title X and prevent evasion of those laws.
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\40\ 12 U.S.C. 5512(b)(1).
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V. Why the Bureau Is Issuing This Proposal
The Bureau proposes to revise the ATR/QM Rule to provide that the
Temporary GSE QM loan definition would expire on the effective date of
a final rule issued by the Bureau amending the General QM loan
definition, or when the GSEs exit conservatorship, whichever comes
first.\41\ The Bureau is proposing those
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amendments to the General QM loan definition in a separate proposal
issued simultaneously with this proposal. In that notice of proposed
rulemaking, the Bureau is proposing to remove the General QM loan
definition's 43 percent DTI limit and replace it with a price-based
threshold.
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\41\ The Bureau is also proposing to make confirming changes to
the commentary. The Bureau is not proposing changes to the language
in Sec. 1026.43(e)(4)(ii)(A)(1) providing that the Temporary GSE QM
loan definition will expire when the GSEs cease to operate under
conservatorship of the FHFA.
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Under that proposal, a loan would meet the General QM loan
definition in Sec. 1026.43(e)(2) only if the APR exceeds the average
prime offer rate (APOR) for a comparable transaction by less than two
percentage points as of the date the interest rate is set.\42\ The
proposal would retain the existing product-feature and underwriting
requirements and limits on points and fees. Although the proposal would
remove the 43 percent DTI limit from the General QM loan definition,
the proposal would require that the creditor consider the consumer's
income or assets, debt, and DTI ratio or residual income and verify the
consumer's current or reasonably expected income or assets other than
the value of the dwelling (including any real property attached to the
dwelling) that secures the loan and the consumer's current debt
obligations, alimony, and child support. The proposal would remove
appendix Q, but would include clarifications of the requirements to
consider and verify a consumer's income, assets, debt obligations,
alimony, and child support, to help prevent compliance uncertainty that
could otherwise result from the removal of appendix Q. The proposal
would preserve the current threshold separating safe harbor from
rebuttable presumption QMs, under which a loan is a safe harbor QM if
its APR exceeds APOR for a comparable transaction by less than 1.5
percentage points as of the date the interest rate is set (or by less
than 3.5 percentage points for subordinate-lien transactions). Although
the Bureau is proposing to remove the 43 percent DTI limit and adopt a
price-based approach for the General QM loan definition, the Bureau is
also requesting comment on two alternative approaches: (1) Retaining
the DTI limit and increasing it to a specific threshold between 45
percent and 48 percent or (2) using a hybrid approach involving both
pricing and a DTI limit, such as applying a DTI limit to loans that are
above specified rate spreads. Under these alternative approaches,
creditors would not be required to count or verify the DTI ratio using
appendix Q.
---------------------------------------------------------------------------
\42\ That proposal would also provide higher thresholds for
loans with smaller loan amounts and for subordinate-lien
transactions.
---------------------------------------------------------------------------
The Bureau expects that the proposed amendments would, among other
things, allow some portion of loans that currently could receive QM
status under the Temporary GSE QM loan definition to receive QM status
under the General QM loan definition if they are made after the
Temporary GSE QM loan definition expires. The Bureau tentatively
determines that the proposed extension would ensure that responsible,
affordable credit remains available to consumers who may be affected if
the Temporary GSE QM loan definition expires before these amendments to
the General QM loan definition take effect. In the Bureau's preliminary
view, it is likely that many consumers who would have obtained loans
under the Temporary GSE QM loan definition--and who would be able to
obtain loans under the amended General QM loan definition, as
separately proposed by the Bureau--would not be able to obtain loans at
all if the Temporary GSE QM loan definition expires and final
amendments to the General QM loan definition have not gone into effect.
Further, for loans absorbed by FHA and the private market in the
absence of the Temporary GSE QM loan definition, there is significant
risk that some consumers would pay more for these loans, although any
pricing effects would depend on the characteristics of the particular
loans that would be originated as FHA loans or in the private market.
To prevent these likely effects on the availability and cost of credit
if the Temporary GSE QM loan definition expires before final amendments
to the General QM loan definition take effect, the Bureau proposes to
revise the ATR/QM Rule to provide that the Temporary GSE QM loan
definition would expire on the effective date of a final rule issued by
the Bureau amending the General QM loan definition, or when the GSEs
exit conservatorship, whichever comes first.
A. Why the Bureau Created the Temporary GSE QM Loan Definition
In the January 2013 Final Rule, the Bureau explained why it created
the Temporary GSE QM loan category. The Bureau observed that it did not
believe that a 43 percent DTI ratio ``represents the outer boundary of
responsible lending'' and acknowledged that historically, and even
after the financial crisis, over 20 percent of mortgages exceeded that
threshold.\43\ The Bureau believed, however, that, as DTI ratios
increase, ``the general ability-to-repay procedures, rather than the
qualified mortgage framework, is better suited for consideration of all
relevant factors that go to a consumer's ability to repay a mortgage
loan'' and that ``[o]ver the long term . . . there will be a robust and
sizable market for prudent loans beyond the 43 percent threshold even
without the benefit of the presumption of compliance that applies to
qualified mortgages.'' \44\
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\43\ 78 FR 6408, 6527 (Jan. 30, 2013).
\44\ Id. at 6527-28.
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At the same time, the Bureau noted that the mortgage market was
especially fragile following the financial crisis, and GSE-eligible
loans and federally insured or guaranteed loans made up a significant
majority of the market.\45\ The Bureau believed that it was appropriate
to consider for a period of time that GSE-eligible loans were
originated with an appropriate assessment of the consumer's ability to
repay and therefore warranted being treated as QMs.\46\ The Bureau
believed in 2013 that this temporary category of QM loans would, in the
near term, help to ensure access to responsible, affordable credit for
consumers with DTI ratios above 43 percent, as well as facilitate
compliance by creditors by promoting the use of widely recognized,
federally related underwriting standards.\47\
---------------------------------------------------------------------------
\45\ Id. at 6533-34.
\46\ Id. at 6534.
\47\ Id. at 6533.
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The January 2013 Final Rule established a sunset date for the
Temporary GSE QM loan definition of January 10, 2021 (seven years after
that rule's effective date), or when the GSEs exit conservatorship,
whichever comes first.\48\ The Bureau stated that it believed a seven-
year period between the Rule's effective date and the Temporary GSE QM
loan definition's sunset date would ``provide an adequate period for
economic, market, and regulatory conditions to stabilize'' and ``a
reasonable transition period to the general qualified mortgage
definition.'' \49\ The Bureau believed that the Temporary GSE QM loan
definition would benefit consumers by preserving access to credit while
the mortgage industry adjusted to the ATR/QM Rule.\50\ The Bureau also
explained that it structured the Temporary GSE QM loan definition to
cover loans eligible to be purchased or guaranteed by either of the
GSEs--regardless of whether the loans are actually purchased or
guaranteed--to leave room for non-GSE private investors to return to
the market
[[Page 41453]]
and secure the same legal protections as the GSEs.\51\ The Bureau
believed that, as the market recovered, the GSEs and the Federal
agencies would be able to reduce their market presence, the percentage
of Temporary GSE QM loans would decrease, and the market would shift
toward General QM loans and non-QM loans above a 43 percent DTI
ratio.\52\ The Bureau's view was that a shift towards non-QM loans
could be supported by the non-GSE private market--i.e., by institutions
holding such loans in portfolio, selling them in whole, or securitizing
them in a rejuvenated private-label securities (PLS) market. The Bureau
noted that, pursuant to its statutory obligations under the Dodd-Frank
Act, it would assess the impact of the ATR/QM Rule five years after the
Rule's effective date, and the assessment would provide an opportunity
to analyze the Temporary GSE QM loan definition.\53\
---------------------------------------------------------------------------
\48\ See 12 CFR 1026.43(e)(4)(ii)(A)(1) and (e)(4)(iii)(B).
\49\ 78 FR 6408, 6534 (Jan. 30, 2013).
\50\ Id. at 6536.
\51\ Id. at 6534.
\52\ Id.
\53\ Id.
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B. The Current State of the Mortgage Market
The mortgage market has evolved differently than the Bureau
predicted when it issued the January 2013 Final Rule. As explained
below, and contrary to the Bureau's expectations, the market has not
shifted away from Temporary GSE QM originations and the private market
\54\ remains small. As noted in the Assessment Report, Temporary GSE QM
originations continue to represent ``a large and persistent'' share of
originations in the conforming segment of the mortgage market, and a
robust and sizable market to support non-QM lending has not
emerged.\55\
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\54\ Consistent with the Assessment Report, references to the
private market herein include loans securitized by PLS and loans
financed by portfolio lending by commercial banks, credit unions,
savings banks, savings associations, mortgage banks, life insurance
companies, finance companies, their affiliate institutions, and
other private purchasers. See Assessment Report, supra note 22, at
74.
\55\ Id. at 198.
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The GSEs' share of the conventional, conforming purchase-mortgage
market was large before the ATR/QM Rule, and the Assessment found a
small increase in that share since the Rule's effective date, reaching
71 percent in 2017.\56\ The Assessment Report noted that, at least for
loans intended for sale in the secondary market, creditors generally
offer a Temporary GSE QM loan even when a General QM loan could be
originated.\57\
---------------------------------------------------------------------------
\56\ Id. at 191.
\57\ Id. at 192.
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The continued prevalence of Temporary GSE QM loan originations is
contrary to the Bureau's expectation at the time it issued the January
2013 Final Rule.\58\ The Assessment Report discussed several possible
reasons for the continued prevalence of Temporary GSE QM loan
originations. The Assessment Report first highlighted commenters'
concerns with the perceived lack of clarity in appendix Q and found
that such concerns ``may have contributed to investors'--and at least
derivatively, creditors'--preference'' for Temporary GSE QM loans
instead of originating loans under the General QM loan definition.\59\
In addition, the Bureau has not revised appendix Q since 2013, while
other standards for calculating and verifying debt and income have been
updated more frequently.\60\ ANPR commenters also expressed concern
with appendix Q and stated that the Temporary GSE QM loan definition
has benefited creditors and consumers by enabling creditors to
originate QMs without having to use appendix Q.
---------------------------------------------------------------------------
\58\ Id. at 13, 190, 238.
\59\ Id. at 193.
\60\ Id. at 193-94.
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The Assessment Report noted that a second possible reason for the
continued prevalence of Temporary GSE QM loans is that the GSEs were
able to accommodate demand for mortgages above the General QM loan
definition's DTI limit of 43 percent as the DTI ratio distribution in
the market shifted upward.\61\ According to the Assessment Report, in
the years since the ATR/QM Rule took effect, house prices have
increased and consumers hold more mortgage and other debt (including
student loan debt), all of which have caused the DTI ratio distribution
to shift upward.\62\ The Assessment Report noted that the share of GSE
home purchase loans with DTI ratios above 43 percent has increased
since the ATR/QM Rule took effect in 2014.\63\ The available data
suggest that such high-DTI lending has declined in the non-GSE market
relative to the GSE market.\64\ The non-GSE market has constricted even
with respect to highly qualified consumers; those with higher incomes
and higher credit scores are representing a greater share of
denials.\65\
---------------------------------------------------------------------------
\61\ Id. at 194.
\62\ Id.
\63\ Id. at 194-95.
\64\ Id. at 119-20.
\65\ Id. at 153.
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The Assessment Report found that a third possible reason for the
persistence of Temporary GSE QM loans is the structure of the secondary
market.\66\ If creditors adhere to the GSEs' guidelines, they gain
access to a robust, highly liquid secondary market.\67\ In contrast,
while private market securitizations have grown somewhat in recent
years, their volume is still a fraction of their pre-crisis levels.\68\
There were less than $20 billion in new origination PLS issuances in
2017, compared with $1 trillion in 2005,\69\ and only 21 percent of new
origination PLS issuances in 2017 were non-QM issuances.\70\ To the
extent that private securitizations have occurred since the ATR/QM Rule
took effect in 2014, the majority of new origination PLS issuances have
consisted of prime jumbo loans made to consumers with strong credit
characteristics, and these securities have a low share of non-QM
loans.\71\ The Assessment Report notes that the Temporary GSE QM loan
definition may itself be inhibiting the growth of the non-QM
market.\72\ However, the Assessment Report also notes that it is
possible that this market might not exist even with a narrower
Temporary GSE QM loan definition, if consumers were unwilling to pay
the premium charged to cover the potential litigation risk associated
with non-QMs, which do not have presumption of compliance with the ATR/
QM Rule, or if creditors were unwilling or lack the funding to make the
loans.\73\
---------------------------------------------------------------------------
\66\ Id. at 196.
\67\ Id.
\68\ Id.
\69\ Id.
\70\ Id. at 197.
\71\ Id. at 196.
\72\ Id. at 205.
\73\ Id.
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The Bureau expects that each of these features of the mortgage
market that concentrate lending within the Temporary GSE QM loan
definition will largely persist through the current January 10, 2021
sunset date.
C. Potential Market Impact of the Temporary GSE QM Loan Definition's
Expiration
The Bureau anticipates that there are two main types of
conventional loans that would be affected by the expiration of the
Temporary GSE QM loan definition: High-DTI GSE loans (those with DTI
ratios above 43 percent) and GSE-eligible loans without appendix Q-
required documentation. These loans are currently originated as QM
loans due to the Temporary GSE QM loan definition but would not be
originated as General QM loans, and may not be originated at all, if
the Temporary GSE QM loan definition were to expire before amendments
to the General QM loan definition are in effect. This
[[Page 41454]]
proposal refers to these loans as potentially displaced loans.
High-DTI GSE Loans. The ANPR provided an estimate of the number of
loans potentially affected by the expiration of the Temporary GSE QM
loan definition.\74\ In providing the estimate, the ANPR focused on
loans that fall within the Temporary GSE QM loan definition but not the
General QM loan definition because they have a DTI ratio above 43
percent. This proposal refers to these loans as High-DTI GSE loans.
Based on data from the National Mortgage Database (NMDB), the Bureau
estimated that there were approximately 6.01 million closed-end first-
lien residential mortgage originations in the United States in
2018.\75\ Based on supplemental data provided by the FHFA, the Bureau
estimated that the GSEs purchased or guaranteed 52 percent--roughly
3.12 million--of those loans.\76\ Of those 3.12 million loans, the
Bureau estimated that 31 percent--approximately 957,000 loans--had DTI
ratios greater than 43 percent.\77\ Thus, the Bureau estimated that, as
a result of the General QM loan definition's 43 percent DTI limit,
approximately 957,000 loans--16 percent of all closed-end first-lien
residential mortgage originations in 2018--were High-DTI GSE loans.\78\
This estimate does not include Temporary GSE QM loans that were
eligible for purchase by either of the GSEs but were not sold to the
GSEs.
---------------------------------------------------------------------------
\74\ 84 FR 37155, 37158-59 (July 31, 2019).
\75\ Id.
\76\ Id. at 37159.
\77\ Id. The Bureau estimates that 616,000 of these loans were
for home purchases, and 341,000 were refinance loans. In addition,
the Bureau estimates that the share of these loans with DTI ratios
over 45 percent has varied over time due to changes in market
conditions and GSE underwriting standards, rising from 47 percent in
2016 to 56 percent in 2017, and further to 69 percent in 2018.
\78\ Id.
---------------------------------------------------------------------------
Loans Without Appendix Q-Required Documentation That Are Otherwise
GSE-Eligible. In addition to High-DTI GSE loans, the Bureau noted that
an additional, smaller number of Temporary GSE QM loans with DTI ratios
of 43 percent or less when calculated using GSE underwriting guides
would not fall within the General QM loan definition because their
method of documenting and verifying income or debt is incompatible with
appendix Q.\79\ These loans would also likely be affected when the
Temporary GSE QM loan definition expires. The Bureau understands, from
extensive public feedback and its own experience, that appendix Q does
not specifically address whether and how to document and include
certain forms of income. The Bureau understands these concerns are
particularly acute for self-employed consumers, consumers with part-
time employment, and consumers with irregular or unusual income
streams.\80\ As a result, these consumers' access to credit may be
affected if the Temporary GSE QM loan definition were to expire before
amendments to the General QM loan definition are in effect.
---------------------------------------------------------------------------
\79\ Id. at 37159 n.58. Where these types of loans have DTI
ratios above 43 percent, they would be captured in the estimate
above relating to High-DTI GSE loans.
\80\ For example, in qualitative responses to the Bureau's
Lender Survey conducted as part of the Assessment, underwriting for
self-employed borrowers was one of the most frequently reported
sources of difficulty in originating mortgages using appendix Q.
These concerns were also raised in comments submitted in response to
the Assessment RFI, noting that appendix Q is ambiguous with respect
to how to treat income for consumers who are self-employed, have
irregular income, or want to use asset depletion as income. See
Assessment Report, supra note 22, at 200.
---------------------------------------------------------------------------
The Bureau's analysis of the market under the baseline focuses on
High-DTI GSE loans because the Bureau estimates that most potentially
displaced loans are High-DTI GSE loans. The Bureau also lacks the loan-
level documentation and underwriting data necessary to estimate with
precision the number of potentially displaced loans that do not fall
within the other General QM loan requirements and are not High-DTI GSE
loans. However, the Assessment did not find evidence of substantial
numbers of loans in the non-GSE-eligible jumbo market being displaced
when appendix Q verification requirements became effective in 2014.\81\
Further, the Assessment Report found evidence of only a limited
reduction in the approval rate of self-employed applicants for non-GSE
eligible mortgages.\82\ Based on this evidence, along with qualitative
comparisons of GSE and appendix Q documentation requirements and
available data on the prevalence of borrowers with non-traditional or
difficult-to-document income (e.g., self-employed borrowers, retired
borrowers, those with irregular income streams), the Bureau estimates
this second category of potentially displaced loans is considerably
less numerous than the category of High-DTI GSE loans.
---------------------------------------------------------------------------
\81\ Id. at 107 (``For context, total jumbo purchase
originations increased from an estimated 108,700 to 130,200 between
2013 and 2014, based on nationally representative NMDB data.'').
\82\ Id. at 118 (``The Application Data indicates that,
notwithstanding concerns that have been expressed about the
challenge of documenting and verifying income for self-employed
borrowers under the General QM standard and the documentation
requirements contained in appendix Q to the Rule, approval rates for
non-High-DTI, non-GSE eligible self-employed borrowers have
decreased only slightly, by two percentage points.'').
---------------------------------------------------------------------------
Additional Effects on Loans Not Displaced. While the most
significant market effects under the baseline are displaced loans,
loans that continue to be originated as QM loans after the expiration
of the Temporary GSE QM loan definition would also be affected. After
the sunset date, all loans with DTI ratios at or below 43 percent that
are or would have been purchased and guaranteed as GSE loans under the
Temporary GSE QM loan definition--approximately 2.16 million loans in
2018--and that continue to be originated as General QM loans after the
provision expires would be required to verify income and debts
according to appendix Q, rather than only according to GSE guidelines.
Given the concerns raised about appendix Q's ambiguity and lack of
flexibility, this would likely entail both increased documentation
burden for some consumers as well as increased costs or time-to-
origination for creditors on some loans.\83\
---------------------------------------------------------------------------
\83\ See part V.B. for additional discussion of concerns raised
about appendix Q.
---------------------------------------------------------------------------
In response to the ANPR, the Bureau received additional estimates
regarding the number of potentially displaced loans. Two comments cited
data from a private provider of mortgage market data indicating that 16
percent of mortgages originated in 2018 were considered QMs solely due
to the Temporary GSE QM loan definition. One of those comments also
stated that a mortgage banker with $4.5 billion in mortgage loan volume
estimated that 25 percent of their mortgages originated in 2018 were
considered QMs solely due to the Temporary GSE QM loan definition. This
comment also stated that a credit union with $68 million in mortgage
loan volume estimated 17 percent of their mortgages originated in 2018
were considered QMs solely due to the Temporary GSE QM loan definition.
A comment from a creditor with a mortgage loan volume of $630 million
stated that 20 percent of the commenter's mortgages originated in 2018
were considered QMs solely due to the Temporary GSE QM loan definition.
These estimates are generally in line with the Bureau's estimates.
Focusing on High-DTI GSE loans, the Bureau expects that these loans
will continue to comprise a significant proportion of mortgage
originations through January 10, 2021, when the Temporary GSE QM loan
definition is currently scheduled to expire.\84\ The ANPR identified
several ways that the market for loans that would have been High-DTI
GSE loans may respond to the expiration of the Temporary GSE QM loan
definition.\85\ In doing so, the
[[Page 41455]]
Bureau made assumptions about the future behavior of certain mortgage
market participants: (1) That there is no change to the GSEs' current
policy that does not allow purchase of non-QM loans; and (2) that
creditors' preference for making Temporary GSE QM loans, and investors'
preference for purchasing such loans, is driven in part by the safe
harbor provided to such loans and that these preferences would continue
at least for some creditors and investors.\86\
---------------------------------------------------------------------------
\84\ 84 FR 37155, 37159 (July 31, 2019).
\85\ Id.
\86\ Id.
---------------------------------------------------------------------------
Given these assumptions, the Bureau expects that many consumers who
would have obtained High-DTI GSE loans would instead obtain FHA-insured
loans because FHA currently insures loans with DTI ratios up to 57
percent.\87\ The number of loans that move to FHA would depend on FHA's
willingness and ability to insure such loans, on whether FHA continues
to treat all loans that it insures as QMs under its own QM rule, and on
how many High-DTI GSE loans exceed FHA's loan-amount limit.\88\ For
example, the Bureau estimates that, in 2018, 11 percent of High-DTI GSE
loans exceeded FHA's loan-amount limit.\89\ The Bureau considers this
an outer limit on the share of High-DTI GSE loans that could move to
FHA.\90\ The Bureau expects that loans that are originated as FHA loans
instead of under the Temporary GSE QM loan definition would generally
cost materially more for many consumers.\91\ The Bureau expects that
some consumers offered FHA loans may choose not to take out a mortgage
because of these higher costs.
---------------------------------------------------------------------------
\87\ Id. In fiscal year 2019, approximately 57 percent of FHA-
insured purchase mortgages had a DTI ratio above 43 percent. U.S.
Dep't of Hous. & Urban Dev., Annual Report to Congress Regarding the
Financial Status of the FHA Mutual Mortgage Insurance Fund, Fiscal
Year 2019, at 33 (Nov. 14, 2018), https://www.hud.gov/sites/dfiles/Housing/documents/2019FHAAnnualReportMMIFund.pdf.
\88\ 84 FR 37155, 37159 (July 31, 2019).
\89\ Id. In 2018, FHA's county-level maximum loan limits ranged
from $271,050 to $721,050. See U.S. Dep't of Hous. & Urban Dev., FHA
Mortgage Limits, https://entp.hud.gov/idapp/html/hicostlook.cfm
(last visited June 12, 2020).
\90\ 84 FR 37155, 37159 (July 31, 2019).
\91\ Interest rates and insurance premiums on FHA loans
generally feature less risk-based pricing than conventional loans,
charging more similar rates and premiums to all consumers. As a
result, they are likely to cost more than conventional loans for
consumers with stronger credit scores and larger down payments.
Consistent with this pricing differential, consumers with higher
credit scores and larger down payments chose FHA loans relatively
rarely in 2018 HMDA data on mortgage originations. See Bureau of
Consumer Fin. Prot., Introducing New and Revised Data Points in HMDA
(Aug. 2019), https://files.consumerfinance.gov/f/documents/cfpb_new-revised-data-points-in-hmda_report.pdf.
---------------------------------------------------------------------------
It is also possible that some consumers who would have sought High-
DTI GSE loans would be able to obtain loans in the private market.\92\
The ANPR noted that the number of loans absorbed by the private market
would likely depend, in part, on whether actors in the private market
are willing to assume the legal and credit risk associated with funding
High-DTI GSE loans as non-QM loans or small-creditor portfolio QM loans
\93\ and, if so, whether actors in the private market would offer more
competitive pricing or terms.\94\ For example, the Bureau estimates
that 55 percent of High-DTI GSE loans in 2018 had credit scores at or
above 680 and loan-to-value (LTV) ratios at or below 80 percent--credit
characteristics traditionally considered attractive to actors in the
private market.\95\ The ANPR also noted that there are certain built-in
costs to FHA loans--namely, mortgage insurance premiums--which could be
a basis for competition, and that depository institutions in recent
years have shied away from originating and servicing FHA loans due to
the obligations and risks associated with such loans.\96\
---------------------------------------------------------------------------
\92\ 84 FR 37155, 37159 (July 31, 2019).
\93\ See 12 CFR 1026.43(e)(5) (extending QM status to certain
portfolio loans originated by certain small creditors). In addition,
section 101 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act, Public Law 115-174, sec. 101, 132 Stat. 1296, 1297
(2018), amended TILA to add a safe harbor for small-creditor
portfolio loans. See 15 U.S.C. 1639c(b)(2)(F).
\94\ 84 FR 37155, 37159 (July 31, 2019).
\95\ Id.
\96\ Id.
---------------------------------------------------------------------------
However, the Assessment Report found that a robust market for non-
QM loans above the 43 percent DTI limit has not materialized as the
Bureau had predicted. Therefore, there is limited capacity in the non-
QM market to provide access to credit after the expiration of the
Temporary GSE QM loan definition.\97\ As described above, the non-QM
market has been further reduced by the recent economic disruptions
associated with the COVID-19 pandemic, with most mortgage credit now
available in the QM lending space. The Bureau acknowledges that the
slow development of the non-QM market, and the recent economic
disruptions that may significantly hinder its development in the near
term, may further reduce access to credit outside the QM space.
---------------------------------------------------------------------------
\97\ Assessment Report, supra note 22 at 198.
---------------------------------------------------------------------------
Finally, the ANPR noted that some consumers who would have sought
High-DTI GSE loans may adapt to changing options and make different
choices, such as adjusting their borrowing to result in a lower DTI
ratio.\98\ However, some consumers who would have sought High-DTI GSE
loans may not obtain loans at all.\99\
---------------------------------------------------------------------------
\98\ 84 FR 37155, 37159 (July 31, 2019).
\99\ Id.
---------------------------------------------------------------------------
D. Why the Bureau Is Proposing To Extend the Temporary GSE QM Loan
Definition
The Bureau anticipates that if the Temporary GSE QM loan definition
expires as scheduled and there are no changes to the General QM loan
definition prior to expiration, many High-DTI GSE loans and loans
without appendix Q-required documentation that are otherwise GSE-
eligible would not be made and many would cost consumers materially
more.\100\ In a separate proposal issued simultaneously with this
proposal, the Bureau is proposing to remove the General QM loan
definition's DTI limit and replace it with a limit based on the loan's
pricing. Under the proposal, a loan would meet the General QM loan
definition only if the APR exceeds APOR for a comparable transaction by
less than two percentage points as of the date the interest rate is
set.\101\ The proposal would also provide higher thresholds for loans
with smaller loan amounts and for subordinate-lien transactions. The
Bureau expects that the proposed amendments would, among other things,
allow some portion of loans that currently could receive QM status
under the Temporary GSE QM loan definition to receive QM status under
the General QM loan definition if they are made after the Temporary GSE
QM loan definition expires.
---------------------------------------------------------------------------
\100\ See supra part V.C.
\101\ The proposal would preserve the current threshold
separating safe harbor from rebuttable presumption QMs, under which
a loan is a safe harbor QM if its APR exceeds APOR for a comparable
transaction by less than 1.5 percentage points as of the date the
interest rate is set (or by less than 3.5 percentage points for
subordinate-lien transactions).
---------------------------------------------------------------------------
The Bureau is concerned about the likely effects on the
availability and cost of credit if the Temporary GSE QM loan definition
expires before final amendments to the General QM loan definition take
effect. While the Bureau can estimate the outer limit of the share of
High-DTI GSE loans that could be originated by the FHA, the Bureau
cannot estimate with precision the extent to which loans would be
absorbed by the FHA, or the characteristics of the particular loans
that might be so absorbed.\102\ Similarly,
[[Page 41456]]
while the Bureau also anticipates that the private market may absorb
additional loans that would have been High-DTI GSE loans, the Bureau is
uncertain as to the private market's capacity to absorb these loans in
the short term--as a robust market for non-QM loans above the 43
percent DTI limit has not materialized as the Bureau had predicted, and
as the non-QM market has been further reduced by the current economic
disruptions associated with the COVID-19 pandemic. And, as noted, the
Bureau lacks the loan-level documentation and underwriting data
necessary to estimate with precision the number of potentially
displaced loans that do not fall within the General QM loan definition
due to appendix Q-related issues and are not High-DTI GSE loans.
Despite these uncertainties, it is likely that many consumers who would
have obtained loans under the Temporary GSE QM loan definition--and who
would be able to obtain loans under the amended General QM loan
definition, as separately proposed by the Bureau--would not be able to
obtain loans at all if the Temporary GSE QM loan definition expires and
final amendments to the General QM loan definition have not gone into
effect.\103\ Further, for loans absorbed by the FHA and the private
market in the absence of the Temporary GSE QM loan definition, there is
significant risk that some consumers would pay more for these loans,
although any pricing effects would depend on the characteristics of the
particular loans that would be originated as FHA loans or in the
private market.\104\
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\102\ Assuming they are still originated, potentially displaced
loans made with high LTVs or to consumers with low credit scores are
the least likely to be absorbed by the private market, and thus most
likely to be absorbed by the FHA. The exact characteristics of loans
likely to be absorbed by the FHA would depend on the relative
pricing and underwriting requirements of FHA and private market
alternatives.
\103\ See supra part V.C, noting that some consumers who would
have sought High-DTI GSE loans may make different choices, such as
by adjusting their borrowing to result in a lower DTI ratio.
\104\ The Assessment Report noted that, while there did not
appear to be a marked change in the relative price of non-QM High-
DTI loans immediately following the implementation of the ATR/QM
Rule, other research has found a 25 basis point premium for non-QM
High-DTI loans in more recent years. Assessment Report, supra note
22, at 121-22.
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To prevent these likely effects on the availability and cost of
credit if the Temporary GSE QM loan definition expires before final
amendments to the General QM loan definition take effect, the Bureau
proposes to extend the Temporary GSE QM loan definition until the
effective date of a final rule issued by the Bureau amending the
General QM loan definition, or when the GSEs exit conservatorship,
whichever comes first. The Bureau proposes this extension to ensure
that responsible, affordable credit remains available to consumers who
may be affected if the Temporary GSE QM loan definition expires before
these amendments take effect.\105\
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\105\ The Bureau expects to finalize a rule amending the General
QM loan definition, at which point the Temporary GSE QM loan
definition would expire under this proposed rule. However, the
Bureau notes that in the unlikely event that such a rule is not
finalized and the current General QM loan definition remains in
place, the Bureau would revisit the Temporary GSE QM loan definition
and take appropriate action. As noted above, the Bureau does not
intend to maintain indefinitely a presumption that loans eligible
for purchase or guarantee by either of the GSEs have been originated
with appropriate consideration of the consumer's ability to repay.
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The Bureau stated in the January 2013 Final Rule that, for a
limited period of time and while the GSEs are under conservatorship of
the FHFA, it believed that GSE-eligible loans are originated with
appropriate consideration of ability to repay.\106\ As discussed in the
ANPR and below, the Bureau is concerned about presuming indefinitely
that loans eligible for purchase or guarantee by either of the GSEs
have been originated with appropriate consideration of the consumer's
ability to repay. However, the Bureau expects that, under current
conditions, it may be appropriate nevertheless to extend that
presumption for a short period until the effective date of Bureau
amendments to the General QM loan definition, in light of concerns
about effects on the availability and cost of credit if the Temporary
GSE QM loan definition expires before a rule revising the General QM
loan definition takes effect.
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\106\ 78 FR 6408, 6534 (Jan. 30, 2013).
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Under the current rule the Temporary GSE QM loan definition would
expire upon the date the GSEs exit conservatorship, even if that occurs
prior to January 10, 2021. The Bureau is not proposing any amendments
to this provision. If either of the GSEs ceases to operate under FHFA
conservatorship prior to the finalization of the Bureau's proposed
amendments to the General QM loan definition, the Temporary GSE QM loan
definition at Sec. 1026.43(e)(4)(ii)(A) would no longer be available.
The Bureau assumes that the conservatorship will remain in place until
the conclusion of the rulemaking concerning the General QM loan
definition; in the event final amendments to that definition are not in
effect at the time the conservatorship of one or both of the GSEs is
terminated, the Bureau will evaluate at that point what, if any, steps
to take in response to such a termination of conservatorship. Comments
on Sec. 1026.43(e)(4)(ii)(A) are outside the scope of this rulemaking
and will not be considered.
The Bureau's actions in proposing to extend the Temporary GSE QM
loan definition and, separately, to amend the General QM loan
definition are informed by the publication in January 2019 of the
Assessment Report, which it prepared as required by section 1022(d) of
the Dodd-Frank Act. The Assessment Report provides information to allow
the Bureau to analyze the impact and status of the ATR/QM Rule.
The Bureau does not intend to issue a final rule amending the
General QM loan definition early enough for it to take effect before
April 1, 2021, particularly given that, as its separate proposal
states, the Bureau proposes a six-month interval between Federal
Register publication of a final rule and the rule's effective date.
VI. Section-by-Section Analysis
1026.43 Minimum Standards for Transactions Secured by a Dwelling
43(e) Qualified Mortgages
43(e)(4) Qualified Mortgage Defined--Special Rules
43(e)(4)(iii) Sunset of Special Rules
43(e)(4)(iii)(B)
Section 1026.43(e)(4)(iii)(B) provides that the Temporary GSE QM
loan definition is available only for covered transactions consummated
on or before January 10, 2021.\107\ The Bureau proposes to revise Sec.
1026.43(e)(4)(iii)(B) to state that the definition is available only
for covered transactions consummated on or before the effective date of
a final rule issued by the Bureau amending Sec. 1026.43(e)(2). Revised
Sec. 1026.43(e)(4)(iii)(B) would also state that the Bureau will amend
Sec. 1026.43(e)(4)(iii)(B) as of that effective date to reflect the
new status.\108\
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\107\ Section 1026.43(e)(4)(iii)(B) also applies to the other
temporary QM loan definitions in Sec. 1026.43(e)(4). However, as
noted above in part II, these other temporary QM loan definitions
have expired because the relevant Federal agencies have issued their
own QM rules. See, e.g., 24 CFR 203.19 (HUD rule).
\108\ The Bureau is not proposing changes to Sec.
1026.43(e)(4)(ii)(A), which provides that the Temporary GSE QM loan
definition is available only for covered transactions consummated on
or before the date Fannie Mae or Freddie Mac (or any limited-life
regulatory entity succeeding the charter of either), respectively,
cease to operate under the conservatorship or receivership of the
FHFA pursuant to section 1367 of the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992, 12 U.S.C. 4501 et seq.
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Comment 43(e)(4)-3 clarifies the relationship between Sec.
1026.43(e)(4)(iii)(B) and (ii)(A). The comment explains that the
Temporary GSE QM loan definition applies only to loans consummated on
or before January 10, 2021, regardless of whether
[[Page 41457]]
Fannie Mae or Freddie Mac (or any limited-life regulatory entity
succeeding the charter of either) continues to operate under the
conservatorship or receivership of the FHFA. The comment also explains
that, accordingly, the Temporary GSE QM loan definition is available
only for covered transactions consummated on or before the earlier of
either (i) the date Fannie Mae or Freddie Mac (or any limited-life
regulatory entity succeeding the charter of either), respectively,
cease to operate under the conservatorship or receivership of the FHFA
or (ii) January 10, 2021. The Bureau proposes to change each of the two
references to January 10, 2021 in this comment to conform with the
proposed change to Sec. 1026.43(e)(4)(iii)(B). The Bureau also
proposes to revise this comment to note that the Bureau will also amend
this comment as of the effective date of a final rule issued by the
Bureau amending Sec. 1026.43(e)(2) to reflect the new status.
The Bureau considers that, compared with the alternatives, the
proposal better ensures the availability of responsible, affordable
mortgage credit to consumers and better addresses the risk of
disruption as the market transitions away from the Temporary GSE QM
loan definition. The Bureau seeks comment on whether a different sunset
date for the Temporary GSE QM loan definition would better ensure the
availability of responsible, affordable mortgage credit to consumers
and better address the risk of disruption as the market transitions
away from the Temporary GSE QM loan definition.\109\
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\109\ The Bureau notes that the proposed extension to the
Temporary GSE QM loan definition's sunset date does not apply to the
temporary points-and-fees cure provision in Sec.
1026.43(e)(3)(iii), which is also set to expire on January 10, 2021.
Unlike the Temporary GSE QM loan definition, the Bureau does not
expect allowing the temporary points-and-fees cure provision to
expire on this date would disrupt the availability of responsible,
affordable mortgage credit to consumers. See Assessment Report,
supra note 22, at 12 (noting that applications for which the points-
and-fees limit will be exceeded are sufficiently rare that creditors
handle them on a case-by-case basis; that, specifically, lenders
typically waive certain fees, with or without a compensating
increase in the interest rate, to avoid exceeding the cap; and that
creditors rarely deny an application to avoid exceeding the QM
points-and-fees cap). Further, unlike the Temporary GSE QM loan
definition, the Bureau is not currently planning any amendments to
the points-and-fees provisions, so there is no need for the Bureau
to extend the temporary provision while the Bureau implements such
amendments. Comments on the expiration date for the temporary
points-and-fees cure provision at Sec. 1026.43(e)(3)(iii) are
outside the scope of this rulemaking.
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One alternative to the proposal would be to remove Sec.
1026.43(e)(4)(iii)(B), as well as the language in Sec.
1026.43(e)(4)(ii)(A)(1) referring to conservatorship, from Regulation
Z.\110\ This would make the Temporary GSE QM loan definition permanent.
The Bureau is not proposing this alternative because it is concerned
about presuming indefinitely that loans eligible to be purchased or
guaranteed by either of the GSEs--whether or not the GSEs are under
conservatorship--have been originated with appropriate consideration of
consumers' ability to repay.\111\ In addition, the Bureau is concerned
that making the Temporary GSE QM loan definition permanent could stifle
innovation and the development of competitive private-sector approaches
to underwriting. The Bureau is also concerned that, as long as the
Temporary GSE QM loan definition continues in effect, the non-GSE
private market is less likely to rebound and that the existence of the
Temporary GSE QM loan definition may be contributing to the continuing
limited non-GSE private market. For these reasons, making the Temporary
GSE QM loan definition permanent appears to be inconsistent with the
purposes of TILA's ATR provision and with the Bureau's mandate.
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\110\ Under this alternative, Sec. 1026.43(e)(4)(ii)(A) would
be revised to read: ``To be purchased or guaranteed by the Federal
National Mortgage Association or the Federal Home Loan Mortgage
Corporation.''
\111\ For example, the Bureau's Assessment Report noted that one
GSE loosened its underwriting standards in ways that proved
unsustainable during the time since the January 2013 Final Rule was
issued. Assessment Report, supra note 22, at 194-95.
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A second alternative would be to remove Sec. 1026.43(e)(4)(iii)(B)
from Regulation Z without removing the language in Sec.
1026.43(e)(4)(ii)(A)(1) referring to conservatorship. This would keep
the Temporary GSE QM loan definition in place until the end of
conservatorship. The Bureau is not proposing this alternative because
the Bureau expects that it will be able to issue final amendments to
the General QM loan definition, and that those amendments would take
effect, prior to the termination of conservatorship. Due to its
concerns described in the paragraph above about negative effects of the
Temporary GSE QM loan definition, the Bureau does not want to maintain
the Temporary GSE QM loan definition any longer than necessary to amend
the General QM loan definition and to ensure a smooth and orderly
transition from the Temporary GSE QM loan definition to the revised
General QM loan definition.
A third alternative to the proposal would be to extend the sunset
date in Sec. 1026.43(e)(4)(iii)(B) to a date certain. The Bureau is
not proposing to extend the sunset date to a date certain because it is
concerned that proposing too short an extension may not provide the
Bureau with adequate time to consider, propose, and promulgate
amendments to the General QM loan definition and creditors with enough
time to bring their operations into compliance with any amendments
adopted by the Bureau. At the same time, the Bureau is concerned that
proposing too long an extension would have the same type of negative
effects as the Bureau describes in the paragraph above regarding making
the Temporary GSE QM loan definition permanent, without any offsetting
benefits because a longer extension is not needed to provide the Bureau
with adequate time to consider, propose, and promulgate amendments to
the General QM loan definition.
As with the January 2013 Final Rule, the Bureau issues this
proposal pursuant to its authority under TILA sections 129C(b)(3)(B)(i)
and 105(a) and Dodd-Frank Act section 1022(b)(1). For the reasons
described above in part V.D, the Bureau tentatively determines that the
proposed extension of the Temporary GSE QM loan definition's sunset
date is necessary and proper to ensure that responsible, affordable
mortgage credit remains available to consumers in a manner consistent
with the purposes of TILA section 129C, as well as necessary and
appropriate to effectuate the purposes of TILA section 129C--including
the purpose of assuring that consumers are offered and receive
residential mortgage loans on terms that reasonably reflect their
ability to repay the loans and that are understandable and not unfair,
deceptive, or abusive. For these same reasons, this proposed extension
is necessary to effectuate the purposes of TILA, which include, among
other things, the above-described purpose of TILA section 129C.
The Bureau requests comment on the proposed revisions to Sec.
1026.43(e)(4)(iii)(B) and comment 43(e)(4)-3 as well as its rationale
for the proposed revisions.
VII. Dodd-Frank Act Section 1022(b) Analysis
A. Overview
As discussed above, this proposal would delay the scheduled
expiration of the Temporary GSE QM loan definition from January 10,
2021 to the effective date of a final rule issued by the Bureau
amending the General QM loan definition. In developing this proposal,
the Bureau has considered the potential benefits, costs, and impacts as
required
[[Page 41458]]
by section 1022(b)(2)(A) of the Dodd-Frank Act. Specifically, section
1022(b)(2)(A) of the Dodd-Frank Act calls for the Bureau to consider
the potential benefits and costs of a regulation to consumers and
covered persons, including the potential reduction of access by
consumers to consumer financial products or services, the impact on
depository institutions and credit unions with $10 billion or less in
total assets as described in section 1026 of the Dodd-Frank Act, and
the impact on consumers in rural areas. The Bureau consulted with
appropriate Federal agencies regarding the consistency of the proposed
rule with prudential, market, or systemic objectives administered by
such agencies as required by section 1022(b)(2)(B) of the Dodd-Frank
Act.
1. Data and evidence
The discussion in this impact analyses relies on data from a range
of sources. These include data collected or developed by the Bureau,
including HMDA \112\ and NMDB \113\ data, as well as data obtained from
industry, other regulatory agencies, and other publicly available
sources. The Bureau also conducted the Assessment and issued the
Assessment Report as required under section 1022(d) of the Dodd-Frank
Act. The Assessment Report provides quantitative and qualitative
information on questions relevant to the proposed rule, including the
extent to which DTI ratios are probative of a consumer's ability to
repay, the effect of rebuttable presumption status relative to safe-
harbor status on access to credit, and the effect of QM status relative
to non-QM status on access to credit. Consultations with other
regulatory agencies, industry, and research organizations inform the
Bureau's impact analyses.
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\112\ HMDA requires many financial institutions to maintain,
report, and publicly disclose loan-level information about
mortgages. These data help show whether creditors are serving the
housing needs of their communities; they give public officials
information that helps them make decisions and policies; and they
shed light on lending patterns that could be discriminatory. HMDA
was originally enacted by Congress in 1975 and is implemented by
Regulation C. See Bureau of Consumer Fin. Prot., Mortgage Data
(HMDA), https://www.consumerfinance.gov/data-research/hmda/.
\113\ The NMDB, jointly developed by the FHFA and the Bureau,
provides de-identified loan characteristics and performance
information for a 5 percent sample of all mortgage originations from
1998 to the present, supplemented by de-identified loan and borrower
characteristics from Federal administrative sources and credit
reporting data. See Bureau of Consumer Fin. Prot., Sources and Uses
of Data at the Bureau of Consumer Financial Protection, at 55-56
(Sept. 2018), https://www.consumerfinance.gov/documents/6850/bcfp_sources-uses-of-data.pdf. Differences in total market size
estimates between NMDB data and Home Mortgage Disclosure Act (HMDA)
data are attributable to differences in coverage and data
construction methodology.
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The data the Bureau relied upon provide detailed information on the
number, characteristics, and performance of mortgage loans originated
in recent years. However, they do not provide information on creditor
costs. As a result, analyses of any impacts of the proposal on creditor
costs, particularly realized costs of complying with underwriting
criteria or potential costs from legal liability are based on more
qualitative information. Similarly, estimates of any changes in burden
on consumers resulting from increased or decreased documentation
requirements are based on qualitative information.
The Bureau seeks comment on its analysis, and additional
information or data which could inform quantitative estimates of the
number of borrowers whose documentation cannot satisfy appendix Q, or
the costs to borrowers or covered persons of complying with appendix Q
documentation requirements. The Bureau also seeks comment or additional
information which could inform quantitative estimates of the
availability, underwriting, and pricing of non-QM alternatives to loans
made under the Temporary GSE QM loan definition.
2. Description of the Baseline
The Bureau considers the benefits, costs, and impacts of the
proposal against the baseline in which the Bureau takes no action and
the Temporary GSE QM loan definition expires on January 10, 2021 or
when the GSEs exit conservatorship, whichever occurs first. Under the
proposal, the Temporary GSE QM loan definition would expire when the
GSEs exit conservatorship or on the effective date of a final rule
issued by the Bureau amending the General QM loan definition, whichever
occurs first. As a result, the proposal's direct market impacts would
occur only if the GSEs remain in conservatorship beyond January 10,
2021. The impact analyses assume the GSEs will remain in
conservatorship for the relevant period of time.
Under the baseline, when the Temporary GSE QM loan definition
expires, conventional loans could only receive QM status under the
Bureau's rules by underwriting according to the General QM
requirements, Small Creditor QM requirements, Balloon Payment QM
requirements, or the expanded portfolio QM amendments created by the
2018 Economic Growth, Regulatory Relief, and Consumer Protection Act.
The General QM loan definition, which would be the only type of QM
available to larger creditors following the expiration of the Temporary
GSE QM loan definition, requires that consumers' DTI ratio not exceed
43 percent and requires creditors to determine debt and income in
accordance with the standards in appendix Q of Regulation Z.
As stated above in part V.C, the Bureau anticipates that, under the
baseline in which the Temporary GSE QM loan definition expires, there
are two main types of conventional loans that would be affected: High-
DTI GSE loans (those with DTI ratios above 43 percent) and GSE-eligible
loans without appendix Q-required documentation. Leaving the current
fixed sunset date in place would affect these loans because they are
currently originated as QM loans due to the Temporary GSE QM loan
definition but would not be originated as General QM loans, and may not
be originated at all, if the Temporary GSE QM loan definition were to
expire before amendments to the General QM loan definition are in
effect. This section 1022 analysis refers to these loans as potentially
displaced loans.
High-DTI GSE Loans. The ANPR provided an estimate of the number of
loans potentially affected by the expiration of the Temporary GSE QM
loan definition.\114\ In providing the estimate, the ANPR focused on
loans that fall within the Temporary GSE QM loan definition but not the
General QM loan definition because they have a DTI ratio above 43
percent. This proposal refers to these loans as High-DTI GSE loans.
Based on NMDB data, the Bureau estimated that there were approximately
6.01 million closed-end first-lien residential mortgage originations in
the United States in 2018.\115\ Based on supplemental data provided by
the FHFA, the Bureau estimated that the GSEs purchased or guaranteed 52
percent--roughly 3.12 million--of those loans.\116\ Of those 3.12
million loans, the Bureau estimated that 31 percent--approximately
957,000 loans--had DTI ratios greater than 43 percent.\117\ Thus, the
Bureau estimated that, as a result of the General QM loan definition's
43 percent DTI limit, approximately
[[Page 41459]]
957,000 loans--16 percent of all closed-end first-lien residential
mortgage originations in 2018--were High-DTI GSE loans.\118\ This
estimate does not include Temporary GSE QM loans that were eligible for
purchase by the GSEs but were not sold to the GSEs.
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\114\ 84 FR 37155, 37158-59 (July 31, 2019).
\115\ Id.
\116\ Id. at 37159.
\117\ Id. The Bureau estimates that 616,000 of these loans were
for home purchases, and 341,000 were refinance loans. In addition,
the Bureau estimates that the share of these loans with DTI ratios
over 45 percent has varied over time due to changes in market
conditions and GSE underwriting standards, rising from 47 percent in
2016 to 56 percent in 2017, and further to 69 percent in 2018.
\118\ Id.
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Loans Without Appendix Q-Required Documentation That Are Otherwise
GSE-Eligible. In addition to High-DTI GSE loans, the Bureau noted that
an additional, smaller number of Temporary GSE QM loans with DTI ratios
of 43 percent or less when calculated using GSE underwriting guides
would not fall within the General QM loan definition because their
method of documenting and verifying income or debt is incompatible with
appendix Q.\119\ These loans would also likely be affected when the
provision expires. The Bureau understands, from extensive public
feedback and its own experience, that appendix Q does not specifically
address whether and how to document and include certain forms of
income. The Bureau understands these concerns are particularly acute
for self-employed consumers, consumers with part-time employment, and
consumers with irregular or unusual income streams.\120\ As a result,
these consumers' access to credit may be affected if the Temporary GSE
QM loan definition were to expire before amendments to the General QM
loan definition are in effect.
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\119\ Id. at 37159 n.58. Where these types of loans have DTI
ratios above 43 percent, they would be captured in the estimate
above relating to High-DTI GSE loans.
\120\ For example, in qualitative responses to the Bureau's
Lender Survey conducted as part of the Assessment, underwriting for
self-employed borrowers was one of the most frequently reported
sources of difficulty in originating mortgages using appendix Q.
These concerns were also raised in comments submitted in response to
the Assessment RFI, noting that appendix Q is ambiguous with respect
to how to treat income for consumers who are self-employed, have
irregular income, or want to use asset depletion as income. See
Assessment Report, supra note 22, at 200.
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The Bureau's analysis of the market under the baseline focuses on
High-DTI GSE loans because the Bureau estimates most potentially
displaced loans are High-DTI GSE loans. The Bureau also lacks the loan-
level documentation and underwriting data necessary to estimate with
precision the number of potentially displaced loans that do not fall
within the other General QM loan requirements and are not High-DTI GSE
loans. However, the Assessment did not find evidence of substantial
numbers of loans in the non-GSE-eligible jumbo market being displaced
when appendix Q documentation requirements became effective in
2014.\121\ Further, the Assessment Report found evidence of only a
limited reduction in the approval rate of self-employed applicants for
non-GSE eligible mortgages.\122\ Based on this evidence, along with
qualitative comparisons of GSE and appendix Q documentation
requirements and available data on the prevalence of borrowers with
non-traditional or difficult-to-document income (e.g., self-employed
borrowers, retired borrowers, those with irregular income streams), the
Bureau estimates this second category of potentially displaced loans is
considerably less numerous than the category of High-DTI GSE loans.
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\121\ Assessment Report, supra note 22, at 107 (``For context,
total jumbo purchase originations increased from an estimated
108,700 to 130,200 between 2013 and 2014, based on nationally
representative NMDB data.'').
\122\ Id. at 118 (``The Application Data indicates that,
notwithstanding concerns that have been expressed about the
challenge of documenting and verifying income for self-employed
borrowers under the General QM standard and the documentation
requirements contained in appendix Q to the Rule, approval rates for
non-High DTI, non-GSE eligible self-employed borrowers have
decreased only slightly, by two percentage points . . . .'').
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Additional Effects on Loans Not Displaced. While the most
significant market effects under the baseline are displaced loans,
loans which continue to be originated as QM loans after the expiration
of the Temporary GSE QM loan definition would also be affected. After
the sunset date, all loans with DTI ratios at or below 43 percent which
are or would have been purchased and guaranteed as GSE loans under the
Temporary GSE QM loan definition--approximately 2.16 million loans in
2018--and that continue to be originated as General QM loans after the
provision expires would be required to verify income and debts
according to appendix Q, rather than only according to GSE guidelines.
Given the concerns raised about appendix Q's ambiguity and lack of
flexibility, this would likely entail both increased documentation
burden for some consumers as well as increased costs or time-to-
origination for creditors on some loans.\123\
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\123\ See part V.B. for additional discussion of concerns raised
about appendix Q.
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B. Potential Benefits and Costs to Covered Persons and Consumers
1. Benefits to Consumers
The primary benefit to consumers of the proposal is the continued
availability of High-DTI GSE loans during the period of the extension.
Given the large number of consumers who obtain such loans rather than
available alternatives, including loans from the private non-GSE market
and FHA loans, these GSE loans may be preferred due to their pricing,
underwriting requirements, or other features.
Under the baseline, a sizeable share of potentially displaced High-
DTI GSE loans may instead be originated as FHA loans. Thus, under the
proposal, any price advantage of GSE loans over FHA loans would be a
realized benefit to consumers. Based on the Bureau's analysis of 2018
HMDA data, FHA loans comparable to the loans received by High-DTI GSE
borrowers, based on loan purpose, credit score, and combined LTV ratio,
on average have $3,000 to $5,000 higher upfront total loan costs. APRs
provide an alternative, annualized measure of costs over the life of a
loan. FHA borrowers typically pay different APRs, which can be higher
or lower than APRs for GSE loans depending on a borrower's credit score
and LTV. Borrowers with credit scores at or above 720 pay an APR 30 to
60 basis points higher than borrowers of comparable GSE loans, leading
to higher monthly payments over the life of the loan. However, FHA
borrowers with credit scores below 680 and combined LTVs exceeding 85
pay an APR 20 to 40 basis points lower than borrowers of comparable GSE
loans, leading to lower monthly payments over the life of the
loan.\124\ For a loan size of $250,000, these APR differences amount to
$2,800 to $5,600 in additional total monthly payments over the first
five years of mortgage payments for borrowers with credit scores above
720, and $1,900 to $3,800 in reduced total monthly payments over five
years for borrowers with credit scores below 680 and LTVs exceeding
85.\125\ Thus all FHA borrowers are likely to pay higher costs at
origination, while some pay higher monthly mortgage payments and others
pay lower monthly mortgage payments. Assuming for comparison that all
957,000 High-DTI GSE loans would be made as FHA loans in the absence of
the proposal, the average of the upfront pricing estimates implies
total savings for consumers of roughly $4 billion per year on upfront
costs while the Temporary GSE QM loan definition
[[Page 41460]]
remains in effect.\126\ The total savings or costs over the life of the
loan implied by APR differences would vary substantially across
borrowers depending on credit scores, LTVs, and length of time holding
the mortgage. While this comparison assumed all potentially displaced
loans would be made as FHA loans, higher costs (either upfront or in
monthly payments) are likely to prevent many borrowers from obtaining
loans at all.
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\124\ The Bureau expects consumers could continue to obtain FHA
loans where such loans were cheaper or preferred for other reasons.
\125\ Based on NMDB data, the Bureau estimates that the average
loan amount among High-DTI GSE borrowers in 2018 was $250,000. While
the time to repayment for mortgages varies with economic conditions,
the Bureau estimates that half of mortgages are typically closed or
paid off five to seven years into repayment. Payment comparisons
based on typical 2018 HMDA APRs for GSE loans, five percent for
borrowers with credit scores over 720, and six percent for borrowers
with credit scores below 680 and LTVs exceeding 85.
\126\ This approximation assumes $4,000 in savings from total
loan costs for all 957,000 consumers. Actual expected savings would
vary substantially based on loan and credit characteristics,
consumer choices, and market conditions.
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In the absence of the proposed amendment to the regulation, some of
these potentially displaced consumers, particularly those with higher
credit scores and the resources to make larger down payments, likely
would be able to obtain credit in the non-GSE private market at a cost
comparable or slightly higher than the costs for GSE loans, but below
the cost of an FHA loan. As a result, the above cost comparisons
between GSE and FHA loans provide an estimated upper bound on pricing
benefits to consumers of the proposal. However, under the baseline,
some potentially displaced consumers may not obtain loans, and thus
would experience benefits of credit access under the proposal.\127\ As
discussed above, the Assessment Report found that the January 2013
Final Rule eliminated between 63 and 70 percent of high-DTI home
purchase loans that were not Temporary GSE QM loans.\128\ The Bureau
requests information or data that would inform quantitative estimates
of the number of consumers who may not obtain loans, and the costs to
such consumers.
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\127\ In particular, the Assessment concluded that some
borrowers with strong credit characteristics may no longer be able
to obtain conventional QM loans, despite likely possessing the
ability to repay such loans. Assessment Report at 150 (``Together,
these findings suggest that the observed decrease in access to
credit in this segment was likely driven by lenders' desire to avoid
the risk of litigation by consumers asserting a violation of the ATR
requirement or other risks associated with that requirement, rather
than by rejections of borrowers who were unlikely to repay the
loan.'').
\128\ See id. at 10-11, 117, 131-47.
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The proposal would also benefit those consumers with incomes
difficult to document using appendix Q to obtain General QM status, as
the Temporary GSE QM loan definition continues to allow documentation
of income and debt through GSE standards. The greater flexibility of
GSE documentation standards likely reduces effort and costs for these
consumers under the proposal, and in the most difficult cases in which
borrowers' documentation cannot satisfy appendix Q, the proposal would
allow consumers to receive Temporary GSE QM loans rather than potential
FHA or non-QM alternatives. These consumers would likely benefit from
cost savings under the proposal, similar to those for High-DTI
consumers discussed above.
2. Benefits to Covered Persons
The proposal's primary benefit to covered persons, specifically
mortgage creditors, is the continued profits from originating High-DTI
conventional QM loans. Under the baseline, creditors would be unable to
originate such loans under the Temporary GSE QM loan definition after
January 10, 2021 and would instead have to originate loans with
comparable DTI ratios as FHA, Small Creditor QM, or non-QM loans, or
originate at lower DTI ratios as conventional General QM loans.
Creditors' current preference for originating large numbers of High-DTI
Temporary GSE QM loans likely reflects advantages in a combination of
costs or guarantee fees (particularly relative to FHA loans), liquidity
(particularly relative to Small Creditor QM), or litigation and credit
risk (particularly relative to non-QM). Moreover, QM loans--including
Temporary GSE QM loans--are exempt from the Dodd-Frank Act risk
retention requirement whereby creditors that securitize mortgage loans
are required to retain at least 5 percent of the credit risk of the
security, which adds significant cost. As a result, the proposal
conveys benefits to mortgage creditors originating Temporary GSE QM
loans on each of these dimensions.
In addition, for those lower-DTI GSE loans which could satisfy
General QM requirements, creditors may realize cost savings from
continuing to underwrite loans using only the more flexible GSE
documentation standards as compared to the appendix Q underwriting
standards required for General QM loans. For GSE consumers unable to
provide documentation compatible with appendix Q, the proposal allows
such loans to continue receiving QM status, providing comparable
benefits to creditors as described for High-DTI GSE loans above.
Finally, those creditors whose business models rely most heavily on
originating High-DTI GSE loans would likely see a competitive benefit
from the continued ability to originate such loans as Temporary GSE QM
loans. This is effectively a transfer in market share to these
creditors from those who primarily originate FHA or private non-GSE
loans, who likely would have gained market share after the expiration
of the Temporary GSE QM loan definition.
3. Costs to Consumers
The extension of the Temporary GSE QM loan definition could delay
the development of the non-QM market, particularly new mortgage
products which may have become available if the Temporary GSE QM loan
definition had been allowed to expire. To the extent that some
consumers would prefer some of these products to GSE loans due to
pricing, documentation flexibility, or other advantages, the delay of
their development would be a cost to consumers of the proposal.
In addition, consumers who would have obtained non-QM loans under
the baseline but instead obtain QM loans under the proposal forgo the
benefit of retaining the ATR causes of action and defenses against
foreclosure.
4. Costs to Covered Persons
The proposal's most sizable costs to covered persons are
effectively transfers between lenders for the duration of the
extension, reflecting temporarily reduced loan origination volume for
lenders who primarily originate FHA or private non-GSE loans and
temporarily increased origination volume for lenders who primarily
originate GSE loans. Business models vary substantially within market
segments, with portfolio lenders and lenders originating non-QM loans
most likely to experience a delay in market share gains possible if the
Temporary GSE QM loan definition had been allowed to expire, while GSE-
focused bank and non-bank lenders are likely to maintain market share
that might be lost sooner in the absence of the proposal.
5. Other Benefits and Costs
In delaying the Temporary GSE QM loan definition's expiration, the
proposal would delay any effects of the expiration on the development
of the secondary market for private (non-GSE) mortgage loan securities.
When the Temporary GSE QM loan definition expires, those loans that do
not fit within the General QM loan definition represent a potential new
market for private securitizations. Thus, the proposal would reduce the
scope of the potential non-QM market for the duration of the extension,
likely lowering profits and revenues for participants in the private
secondary market. This would effectively be a transfer from these
private secondary market participants to participants in the agency
secondary market.
[[Page 41461]]
Potential Impact on Depository Institutions and Credit Unions With $10
Billion or Less in Total Assets, as Described in Section 1026
The proposal's expected impact on depository institutions and
credit unions that are also creditors making covered loans (depository
creditors) with $10 billion or less in total assets is similar to the
expected impact on larger creditors and on non-depository creditors. As
discussed in part VII.B.4 (Costs to Covered Persons), depository
creditors originating portfolio loans may experience a delay in
potential market share gains that would occur in the absence of the
proposal. In addition, those smaller creditors originating portfolio
loans can originate High-DTI Small Creditor QM loans under the rule,
and thus may rely less on the Temporary GSE QM loan definition for
originating High-DTI loans. If the expiration of the Temporary GSE QM
loan definition would confer a competitive advantage to these small
creditors in their origination of High-DTI loans, the proposal would
delay this outcome.
Conversely, those small creditors that primarily rely on the GSEs
as a secondary market outlet because they do not have the capacity to
hold numerous loans on portfolio or the infrastructure or scale to
securitize loans may continue to benefit from the ability to make High-
DTI GSE loans as Temporary GSE QM loans. In the absence of the
proposal, these creditors would be limited to originating GSE loans as
QMs only with DTI at or below 43 percent under the General QM loan
definition. These creditors may also originate FHA, VA, or USDA loans
or non-QM loans for private securitizations, likely at a higher cost
relative to Temporary GSE QM loans.
Potential Impact on Rural Areas
The proposal's expected impact on rural areas is similar to the
expected impact on non-rural areas. Based on 2018 HMDA data, the Bureau
estimates that High-DTI conventional purchase mortgages are comparably
likely to be reported as initially sold to the GSEs in rural areas
(52.5 percent) as in non-rural areas (52.0 percent).\129\
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\129\ These statistics are estimated based on originations from
the first nine months of the year, to allow time for loans to be
sold before HMDA reporting deadlines. In addition, a higher share of
High-DTI conventional purchase non-rural loans (33.3 percent) report
being sold to other non-GSE purchasers compared to rural loans (22.3
percent).
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VIII. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA), as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996, requires each
agency to consider the potential impact of its regulations on small
entities, including small businesses, small governmental units, and
small not-for-profit organizations. The RFA defines a ``small
business'' as a business that meets the size standard developed by the
Small Business Administration pursuant to the Small Business Act.\130\
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\130\ 5 U.S.C. 601(3) (the Bureau may establish an alternative
definition after consultation with the Small Business Administration
and an opportunity for public comment).
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The RFA generally requires an agency to conduct an initial
regulatory flexibility analysis (IRFA) and a final regulatory
flexibility analysis (FRFA) of any rule subject to notice-and-comment
rulemaking requirements, unless the agency certifies that the rule
would not have a significant economic impact on a substantial number of
small entities.\131\ The Bureau also is subject to certain additional
procedures under the RFA involving the convening of a panel to consult
with small business representatives prior to proposing a rule for which
an IRFA is required.\132\
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\131\ 5 U.S.C. 603-605.
\132\ 5 U.S.C. 609.
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An IRFA is not required for this proposal because the proposal, if
adopted, would not have a significant economic impact on a substantial
number of small entities. The Bureau does not expect the final rule to
impose costs on small entities relative to the baseline. Under the
baseline, the Temporary GSE QM loan definition expires, and therefore
no creditor--including small entities--would be able to originate QM
loans under that definition. Under the proposal, certain small entities
that would otherwise not be able to originate QM loans under that
definition would be able to originate such loans with QM status. Thus,
the Bureau anticipates that the proposal would only reduce burden on
small entities relative to the baseline.
Accordingly, the Director certifies that this proposal, if adopted,
would not have a significant economic impact on a substantial number of
small entities. The Bureau requests comment on its analysis of the
impact of the proposal on small entities and requests any relevant
data.
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA),\133\ Federal
agencies are generally required to seek, prior to implementation,
approval from the Office of Management and Budget (OMB) for information
collection requirements. Under the PRA, the Bureau may not conduct or
sponsor, and, notwithstanding any other provision of law, a person is
not required to respond to, an information collection unless the
information collection displays a valid control number assigned by OMB.
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\133\ 44 U.S.C. 3501 et seq.
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The Bureau has determined that this proposal does not contain any
new or substantively revised information collection requirements other
than those previously approved by OMB under that OMB control number
3170-0015. The proposal would amend 12 CFR part 1026 (Regulation Z),
which implements TILA. OMB control number 3170-0015 is the Bureau's OMB
control number for Regulation Z.
The Bureau welcomes comments on these determinations or any other
aspect of the proposal for purposes of the PRA.
X. Signing Authority
The Director of the Bureau, having reviewed and approved this
document, is delegating the authority to electronically sign this
document to Laura Galban, a Bureau Federal Register Liaison, for
purposes of publication in the Federal Register.
List of Subjects in 12 CFR Part 1026
Advertising, Banks, Banking, Consumer protection, Credit, Credit
unions, Mortgages, National banks, Reporting and recordkeeping
requirements, Savings associations, Truth-in-lending.
Authority and Issuance
For the reasons set forth above, the Bureau proposes to amend
Regulation Z, 12 CFR part 1026, as set forth below:
PART 1026--TRUTH IN LENDING (REGULATION Z)
0
1. The authority citation for part 1026 continues to read as follows:
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353,
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.
Subpart E--Special Rules for Certain Home Mortgage Transactions
0
2. Amend Sec. 1026.43 by revising paragraph (e)(4)(iii)(B) to read as
follows:
Sec. 1026.43 Minimum standards for transactions secured by a
dwelling.
* * * * *
(e) * * *
(4) * * *
[[Page 41462]]
(iii) * * *
(B) Unless otherwise expired under paragraph (e)(4)(iii)(A) of this
section, the special rules in this paragraph (e)(4) are available only
for covered transactions consummated on or before the effective date of
a final rule issued by the Bureau amending paragraph (e)(2) of this
section. The Bureau will also amend this paragraph as of that effective
date to reflect the new status.
* * * * *
0
3. In Supplement I to Part 1026--Official Interpretations, under
Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling, revise 43(e)(4) Qualified mortgage defined--special rules to
read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Section 1026.43--Minimum standards for transactions secured by a
dwelling.
* * * * *
43(e)(4) Qualified mortgage defined--special rules.
1. Alternative definition. Subject to the sunset provided under
Sec. 1026.43(e)(4)(iii), Sec. 1026.43(e)(4) provides an
alternative definition of qualified mortgage to the definition
provided in Sec. 1026.43(e)(2). To be a qualified mortgage under
Sec. 1026.43(e)(4), the transaction must satisfy the requirements
under Sec. 1026.43(e)(2)(i) through (iii), in addition to being one
of the types of loans specified in Sec. 1026.43(e)(4)(ii)(A)
through (E).
2. Termination of conservatorship. Section 1026.43(e)(4)(ii)(A)
requires that a covered transaction be eligible for purchase or
guarantee by the Federal National Mortgage Association (Fannie Mae)
or the Federal Home Loan Mortgage Corporation (Freddie Mac) (or any
limited-life regulatory entity succeeding the charter of either)
operating under the conservatorship or receivership of the Federal
Housing Finance Agency pursuant to section 1367 of the Federal
Housing Enterprises Financial Safety and Soundness Act of 1992 (12
U.S.C. 4617). The special rule under Sec. 1026.43(e)(4)(ii)(A) does
not apply if Fannie Mae or Freddie Mac (or any limited-life
regulatory entity succeeding the charter of either) has ceased
operating under the conservatorship or receivership of the Federal
Housing Finance Agency. For example, if either Fannie Mae or Freddie
Mac (or succeeding limited-life regulatory entity) ceases to operate
under the conservatorship or receivership of the Federal Housing
Finance Agency, Sec. 1026.43(e)(4)(ii)(A) would no longer apply to
loans eligible for purchase or guarantee by that entity; however,
the special rule would be available for a loan that is eligible for
purchase or guarantee by the other entity still operating under
conservatorship or receivership.
3. Timing. Under Sec. 1026.43(e)(4)(iii), the definition of
qualified mortgage under Sec. 1026.43(e)(4) applies only to loans
consummated on or before the effective date of a final rule issued
by the Bureau amending Sec. 1026.43(e)(2), regardless of whether
Fannie Mae or Freddie Mac (or any limited-life regulatory entity
succeeding the charter of either) continues to operate under the
conservatorship or receivership of the Federal Housing Finance
Agency. Accordingly, Sec. 1026.43(e)(4) is available only for
covered transactions consummated on or before the earlier of either:
i. The date Fannie Mae or Freddie Mac (or any limited-life
regulatory entity succeeding the charter of either), respectively,
cease to operate under the conservatorship or receivership of the
Federal Housing Finance Agency pursuant to section 1367 of the
Federal Housing Enterprises Financial Safety and Soundness Act of
1992 (12 U.S.C. 4617); or
ii. The effective date of a final rule issued by the Bureau
amending Sec. 1026.43(e)(2), as provided by Sec.
1026.43(e)(4)(iii)(B). The Bureau will also amend this commentary as
of that effective date to reflect the new status.
4. Eligible for purchase, guarantee, or insurance except with
regard to matters wholly unrelated to ability to repay. To satisfy
Sec. 1026.43(e)(4)(ii), a loan need not be actually purchased or
guaranteed by Fannie Mae or Freddie Mac or insured or guaranteed by
one of the Agencies (the U.S. Department of Housing and Urban
Development (HUD), U.S. Department of Veterans Affairs (VA), U.S.
Department of Agriculture (USDA), or Rural Housing Service (RHS)).
Rather, Sec. 1026.43(e)(4)(ii) requires only that the creditor
determine that the loan is eligible (i.e., meets the criteria) for
such purchase, guarantee, or insurance at consummation. For example,
for purposes of Sec. 1026.43(e)(4), a creditor is not required to
sell a loan to Fannie Mae or Freddie Mac (or any limited-life
regulatory entity succeeding the charter of either) for that loan to
be a qualified mortgage; however, the loan must be eligible for
purchase or guarantee by Fannie Mae or Freddie Mac (or any limited-
life regulatory entity succeeding the charter of either), including
satisfying any requirements regarding consideration and verification
of a consumer's income or assets, credit history, debt-to-income
ratio or residual income, and other credit risk factors, but not any
requirements regarding matters wholly unrelated to ability to repay.
To determine eligibility for purchase, guarantee or insurance, a
creditor may rely on a valid underwriting recommendation provided by
a GSE automated underwriting system (AUS) or an AUS that relies on
an Agency underwriting tool; compliance with the standards in the
GSE or Agency written guide in effect at the time; a written
agreement between the creditor or a direct sponsor or aggregator of
the creditor and a GSE or Agency that permits variation from the
standards of the written guides and/or variation from the AUSs, in
effect at the time of consummation; or an individual loan waiver
granted by the GSE or Agency to the creditor. For creditors relying
on the variances of a sponsor or aggregator, a loan that is
transferred directly to or through the sponsor or aggregator at or
after consummation complies with Sec. 1026.43(e)(4). In using any
of the four methods listed above, the creditor need not satisfy
standards that are wholly unrelated to assessing a consumer's
ability to repay that the creditor is required to perform. Matters
wholly unrelated to ability to repay are those matters that are
wholly unrelated to credit risk or the underwriting of the loan.
Such matters include requirements related to the status of the
creditor rather than the loan, requirements related to selling,
securitizing, or delivering the loan, and any requirement that the
creditor must perform after the consummated loan is sold,
guaranteed, or endorsed for insurance such as document custody,
quality control, or servicing.
Accordingly, a covered transaction is eligible for purchase or
guarantee by Fannie Mae or Freddie Mac, for example, if:
i. The loan conforms to the relevant standards set forth in the
Fannie Mae Single-Family Selling Guide or the Freddie Mac Single-
Family Seller/Servicer Guide in effect at the time, or to standards
set forth in a written agreement between the creditor or a sponsor
or aggregator of the creditor and Fannie Mae or Freddie Mac in
effect at that time that permits variation from the standards of
those guides;
ii. The loan has been granted an individual waiver by a GSE,
which will allow purchase or guarantee in spite of variations from
the applicable standards; or
iii. The creditor inputs accurate information into the Fannie
Mae or Freddie Mac AUS or another AUS pursuant to a written
agreement between the creditor and Fannie Mae or Freddie Mac that
permits variation from the GSE AUS; the loan receives one of the
recommendations specified below in paragraphs A or B from the
corresponding GSE AUS or an equivalent recommendation pursuant to
another AUS as authorized in the written agreement; and the creditor
satisfies any requirements and conditions specified by the relevant
AUS that are not wholly unrelated to ability to repay, the non-
satisfaction of which would invalidate that recommendation:
A. An ``Approve/Eligible'' recommendation from Desktop
Underwriter (DU); or
B. A risk class of ``Accept'' and purchase eligibility of
``Freddie Mac Eligible'' from Loan Prospector (LP).
5. Repurchase and indemnification demands. A repurchase or
indemnification demand by Fannie Mae, Freddie Mac, HUD, VA, USDA, or
RHS is not dispositive of qualified mortgage status. Qualified
mortgage status under Sec. 1026.43(e)(4) depends on whether a loan
is eligible to be purchased, guaranteed, or insured at the time of
consummation, provided that other requirements under Sec.
1026.43(e)(4) are satisfied. Some repurchase or indemnification
demands are not related to eligibility criteria at consummation. See
comment 43(e)(4)-4. Further, even where a repurchase or
indemnification demand relates to whether the loan satisfied
relevant eligibility requirements as of the time of consummation,
the mere fact that a demand has been made, or even resolved, between
a creditor and GSE or agency is not dispositive for purposes of
Sec. 1026.43(e)(4). However, evidence of whether a particular loan
satisfied the Sec. 1026.43(e)(4) eligibility criteria
[[Page 41463]]
at consummation may be brought to light in the course of dealing
over a particular demand, depending on the facts and circumstances.
Accordingly, each loan should be evaluated by the creditor based on
the facts and circumstances relating to the eligibility of that loan
at the time of consummation. For example:
i. Assume eligibility to purchase a loan was based in part on
the consumer's employment income of $50,000 per year. The creditor
uses the income figure in obtaining an approve/eligible
recommendation from DU. A quality control review, however, later
determines that the documentation provided and verified by the
creditor to comply with Fannie Mae requirements did not support the
reported income of $50,000 per year. As a result, Fannie Mae demands
that the creditor repurchase the loan. Assume that the quality
control review is accurate, and that DU would not have issued an
approve/eligible recommendation if it had been provided the accurate
income figure. The DU determination at the time of consummation was
invalid because it was based on inaccurate information provided by
the creditor; therefore, the loan was never a qualified mortgage
under Sec. 1026.43(e)(4).
ii. Assume that a creditor delivered a loan, which the creditor
determined was a qualified mortgage at the time of consummation
under Sec. 1026.43(e)(4), to Fannie Mae for inclusion in a
particular To-Be-Announced Mortgage Backed Security (MBS) pool of
loans. The data submitted by the creditor at the time of loan
delivery indicated that the various loan terms met the product type,
weighted-average coupon, weighted-average maturity, and other MBS
pooling criteria, and MBS issuance disclosures to investors
reflected this loan data. However, after delivery and MBS issuance,
a quality control review determines that the loan violates the
pooling criteria. The loan still meets eligibility requirements for
Fannie Mae products and loan terms. Fannie Mae, however, requires
the creditor to repurchase the loan due to the violation of MBS
pooling requirements. Assume that the quality control review
determination is accurate. Because the loan still meets Fannie Mae's
eligibility requirements, it remains a qualified mortgage based on
these facts and circumstances.
* * * * *
Dated: June 22, 2020.
Laura Galban,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2020-13741 Filed 7-9-20; 8:45 am]
BILLING CODE 4810-AM-P